Chapter 28, Problem 5BCP

Summary Introduction

Case summary: Company DI invested 4 million dollars in two different security offerings from company GSC. The investments in the securities were in the collateralized debt obligation and the securities will be valued on the basis of residential mortgage-backed securities. The value of the security was depended on the subprime residential mortgage performance. Company GSC noticed several red flags related to the investments done in the subprime market, where the company has invested highly. Company GSC started betting against the subprime mortgages to limit the risk. The investment was made assuming that the securities mortgaged and subprime mortgage value will decrease. The CDO was downgraded by GSC, which resulted in heavy loss to DI but benefited GSC.

To explain:The recovery of the amount by DI under SEC rule 10b-5.